Rising inflation threatens public-sector pay policy

The Government was warned yesterday that its public-sector pay policy is in danger of collapse. The freeze on pay bills will come under severe strain this year because of rising inflation, the independent research group Incomes Data Services says .

With the City predicting that the Retail Price Index will be up by as much as 4.5 per cent at the end of the year and a rising shortage of key employees, public-sector organisations will face mounting financial problems.

The report by IDS emerges the day before pay-review bodies are due to recommend salary increases for 1.4 million employees of up to 3 per cent. Ministers have encountered anger in particular over their refusal to fund an expected award to teachers of about 2.7 per cent.

Since the Chancellor of the Exchequer, Kenneth Clarke, announced the freeze on public-sector pay bills in November 1993, the policy has shifted "more explicitly" away from efficiency measures to cutting jobs and services as a means of funding salary rises, IDS says.

In a review of pay in the public sector, IDS points out that last year rises more or less matched the unexpectedly low inflation rate, but this may be harder to achieve this year.

IDS also points out that in a largely unnoticed section of his Budget speech, Mr Clarke announced a one-year extension of the freeze to March 1998.

"As we move through the 1995 pay round, it may be that the Government comes under increasing pressure to concede bigger pay rises that can be paid for by job cuts or other savings," the study says.

It concludes that there were times during 1994 when the policy of funding rises from savings looked "extremely fragile" and says it could be argued that the pay settlements for signal workers, MPs and police all broke the policy.

In a separate document IDS reports that an increasing proportion of private-sector deals go unreported in official figures. More companies are converting a proportion of wages into "tax-free pay".